Bet on a Good Yield With Chimera

I'm a big fan of dividend stocks. Most of the stocks I invest in are stocks I want to own for decades and accumulate large income streams by reinvesting my dividends and building large positions. Chimera Investment Corporation (CIM) is a little bit different of a strategy, even though it yields more than any other stock I own.

Chimera is a real estate investment trust that invests in residential morgage backed securities. Yikes, that sounds awful, doesn't it? Aren't mortgage backed securities a disaster? Well, yes and no. Chimera has some of the best management in the industry and they hold a basket of securities, which a calculated risk profile.

The way that Chimera primarily makes money is by the spread of its cost of capital and the rate of return on the securities which it holds. With its cost of capital at ultra low rates due to our current Fed policy, the company is making good money and enough to justify a very large yield (currently over 14%).

The stock price is somewhat supressed because the mainstream point of view is that interest rates are going to rise and hurt the ability of Chimera to make money. This helps create the large yield that we see.

The problem is that people are assuming interest rates are going to rise simply because they are so low. The old argument "Well, they can't get any lower" doesn't hold in my opinion. Sure, they can't get lower, but they can stay where they are for years (even decades). Just ask Japan.

This investment is essentially a bet on the Federal Reserve holding rates where they are for years, which is exactly what I think is going to happen. Currently, they are still wondering how they will stop expanding their balance sheet (quantitative easing). We're still a ways away from raising rates.

If you subscribe to this thesis as I do, then Chimera could be a good place to park some money and earn a massive yield. I've been holding the stock now for a year or so, and have received very nice dividends and the share price is still above where I bought it. My margin of safety is growing on the stock based on my entry point and dividends collected.

Disclosure: I am long CIM.